What is Share? | Types of Shares | Comparison of Different Shares | PDF Included

April 27, 2024 Sushanta Maiti

Shares and stocks are terms often used interchangeably, and they both refer to ownership in a company. However, there are some subtle differences between the two. Here’s a breakdown:

Share:

A single unit of ownership in a company.
When you buy a share, you’re essentially buying a tiny piece of the company.
The number of shares you own determines your percentage ownership stake.
For instance, if a company has issued 1 million shares and you own 10,000 shares, you would own 1% of the company.

Stock:

A more general term for a collection of shares.
It can refer to shares in one company or a portfolio of shares in multiple companies.
So, if you say you “own stock,” it implies you have some ownership stake in at least one company, but it doesn’t specify the details.

Here’s an analogy to illustrate the difference:

Imagine a company is a pizza.
The company cuts the pizza into slices (shares).
If you buy one slice, you own that specific slice (share).
But if you say you have pizza (stock), it could mean you have one slice or multiple slices from different pizzas (companies).

Benefits of Owning Shares (Stock):

Potential for capital gains: If the company performs well and its stock price increases, you can sell your shares for a profit.
Dividends: Some companies share their profits with shareholders through dividend payouts, which are essentially cash payments per share owned.
Voting rights: Depending on the type of share you own, you might have voting rights on company decisions.

Owning shares (stock) involves some risks as well:

Company performance: If the company struggles, the stock price could decline, and you might lose money if you sell your shares at a lower price than you bought them.
Market volatility: Stock prices can fluctuate due to various market factors, so there’s always some level of risk involved.

There are mainly 4 types of Shares:

Ordinary Shares (Equity Shares),
Preference Shares,
Differential Voting Rights (DVR) Shares,
Treasury Shares.

Today I’ll share some knowledge about Shares.

What you are going to learn?

What are the Ordinary Shares or Equity Shares?

Ordinary shares, also commonly known as equity shares, are the most basic and widely traded type of share issued by a company. They represent the most fundamental form of ownership in a company and come with a combination of rights and risks for shareholders.

Here’s a detailed breakdown of ordinary shares (equity shares):

Ownership Rights:

Voting Rights: Ordinary shareholders have the right to vote on important company matters. This includes voting on electing board members, approving major business decisions like mergers and acquisitions, and even proposals related to compensation for company executives. The number of votes typically corresponds to the number of shares owned, with one vote per share being the most common scenario.
Profits (Dividends): Ordinary shareholders may receive a portion of the company’s profits in the form of dividends. However, unlike preference shares (discussed later), dividends for ordinary shares are not guaranteed. The company’s board of directors decides whether or not to distribute dividends, and the amount distributed depends on the company’s profitability.
Capital Appreciation: Ordinary shares have the potential for capital appreciation, meaning their price can increase over time. This happens if the company performs well, its future prospects appear bright, or there’s a general increase in investor demand for the company’s shares. Shareholders can profit by selling their shares at a higher price than they bought them for.

Risks Associated with Ordinary Shares:

No Guaranteed Dividends: As mentioned earlier, dividends for ordinary shares are not guaranteed. The company may choose to reinvest its profits for growth or simply not have enough profits to distribute after covering expenses.
Company Performance: The value of ordinary shares is directly tied to the company’s performance. If the company struggles financially, its stock price could decline, and shareholders could lose money if they sell their shares at a lower price than they bought them for.
Market Volatility: The overall stock market can be volatile, and ordinary share prices can fluctuate due to various factors beyond the company’s control, such as economic conditions, interest rates, and investor sentiment.
Lower Priority in Liquidation: In the unfortunate event of a company liquidation (closure), ordinary shareholders are last in line to receive any remaining assets after debts are paid and preference shareholders (if applicable) are compensated.

Overall, ordinary shares offer investors a chance to:

Own a piece of a company: By buying ordinary shares, you become a partial owner of the company and have a stake in its success.
Potentially earn dividends: Regular dividend payouts can provide a steady stream of income for investors.
Benefit from capital appreciation: If the company performs well, the value of your shares could increase, allowing you to profit by selling them at a higher price.

However, ordinary shares also come with inherent risks:

No guaranteed income: Dividends are not guaranteed, and the share price can be volatile.
Potential for loss: The value of your shares could decline if the company or the overall market struggles.
Lower priority in liquidation: You may not receive any compensation if the company goes bankrupt.

Therefore, it’s crucial to carefully consider your investment goals and risk tolerance before investing in ordinary shares. They are suitable for investors who:

Have a long-term investment horizon and can tolerate some risk.
Are looking for potential capital appreciation and the possibility of dividend income.
Want to have a say in company decisions through voting rights.

What are the Preference Shares?

Preference shares, also known as preferred stock, are a special type of company share class that offers certain advantages to shareholders compared to common shareholders (ordinary shares). Here’s a breakdown of the key features of preference shares:

Priority on Dividends:

The most prominent benefit of preference shares is the preferential treatment regarding dividend payouts.
Preference shareholders receive dividends before any dividends are distributed to common shareholders.
The dividend amount for preference shares is typically fixed, meaning it’s a predetermined percentage of the par value (face value) of the share.
This provides a level of predictability and stability in terms of income for preference shareholders.

Capital Repayment Priority (in Liquidation):

If a company goes out of business and needs to liquidate its assets (sell everything it owns to pay off debts), preference shareholders have priority over common shareholders when it comes to getting their investment back.
This means that after the company pays off its creditors (people and businesses it owes money to), preference shareholders will be repaid their share capital before any remaining assets are distributed to common shareholders.

Voting Rights (Optional):

Unlike common shares, which typically come with voting rights on company decisions, preference shares may or may not have voting rights.
It depends on the specific terms set by the company when issuing the preference shares.
Some preference shares might have limited voting rights on specific matters, while others might have no voting rights at all.

Types of Preference Shares:

There are different variations of preference shares with additional features:
- Redeemable Preference Shares: The company has the right to repurchase these shares from shareholders after a certain period or upon meeting specific conditions.
- Convertible Preference Shares: These shares can be converted into ordinary shares under certain circumstances, allowing shareholders to benefit from potential capital gains if the stock price increases.

Advantages of Preference Shares for Investors:

Steady Income: The fixed dividend provides a predictable stream of income, which can be attractive for investors seeking regular payouts.
Lower Risk Than Common Shares: The priority on dividends and capital repayment during liquidation makes preference shares a less risky option compared to common shares.

Disadvantages of Preference Shares for Investors:

Limited Growth Potential: Unlike common shares, which can appreciate significantly in value, preference shares typically have a fixed dividend and limited potential for capital gains.
No Voting Rights (in some cases): If you prioritize having a say in company decisions, preference shares with no voting rights might not be ideal.

Overall, preference shares are a suitable option for investors who:

Seek a steady stream of income through regular dividend payouts.
Prefer a lower-risk investment compared to common shares.
Are comfortable with potentially limited capital appreciation and potentially no voting rights (depending on the specific preference share).

What are DVR Shares?

Differential Voting Rights (DVR) shares are a type of equity share issued by a company that comes with limited voting rights compared to ordinary shares (common stock). Here’s a detailed breakdown of DVR shares:

Key Characteristics:

Voting Rights: DVR shareholders have fewer voting rights on company decisions compared to holders of ordinary shares. This can vary depending on the company’s specific terms, but it often translates to a fraction of a vote per share or a vote only on certain matters.
Dividends: To compensate for the limited voting rights, DVR shares typically offer higher dividend payouts than ordinary shares. The idea is to incentivize investors to accept less control over the company in exchange for a potentially steady stream of income.
Raising Capital: Companies may issue DVR shares as a way to raise capital without diluting the voting power of existing shareholders, particularly the founders or promoters. This can be a strategy for established companies to bring in new investors for growth while maintaining control over major decisions.

Advantages of DVR Shares:

For Investors:
- Higher Dividend Potential: The promise of a consistent and potentially higher dividend stream can be attractive for income-oriented investors.
- Lower Investment Cost: DVR shares are often issued at a discount compared to ordinary shares due to the limited voting rights. This allows investors to acquire more shares for their money, potentially increasing their dividend yield.
For Companies:
- Access to Capital: DVRs provide a way to raise funds from new investors without giving up significant control over voting rights.
- Alignment of Interests: By offering higher dividends, DVRs can attract investors who are more focused on financial returns and less concerned about influencing company decisions.

Disadvantages of DVR Shares:

For Investors:
- Limited Influence: The reduced voting power restricts investors’ ability to participate in shaping the company’s direction.
- Lower Growth Potential: While dividends offer income, DVR shares typically have lower growth potential compared to ordinary shares, as their price appreciation might be limited.
For Companies:
- Negative Perception: The use of DVR shares can sometimes be viewed negatively by investors, as it raises concerns about control and transparency.

Regulations:

Issuing DVR shares is subject to regulations that vary by country. These regulations often limit the percentage of a company’s total shares that can be DVRs and may have specific requirements regarding financial performance and shareholder approval.

Overall, DVR shares can be a suitable option for:

Investors: Who prioritize income generation and are comfortable with limited voting rights.
Companies: Seeking to raise capital while maintaining control over decision-making.

It’s important to carefully consider the pros and cons of DVR shares before investing in them. Always research the specific terms and conditions offered by the company before making a decision.

What are the Treasury Shares?

Treasury shares, also referred to as reacquired shares, are a company’s own shares that it has bought back from existing shareholders through various methods like open market purchases, tender offers, or employee stock option (ESO) plans. These repurchased shares are then held in the company’s treasury, rather than being cancelled or reissued immediately.

Here’s a closer look at treasury shares:

Key Characteristics:

Not Outstanding Shares: Treasury shares are not considered outstanding shares. This means they don’t entitle the company to voting rights or dividend payouts. They essentially represent a reduction in the total number of shares available for public trading (outstanding shares).
Management of Capital Structure: Companies can use treasury shares to manage their capital structure in several ways. One reason is to increase earnings per share (EPS). Since EPS is calculated by dividing the company’s profit by the number of outstanding shares, reducing the number of outstanding shares through treasury buybacks can lead to a higher EPS ratio, potentially making the company’s stock more attractive to investors.
Other Uses: Companies may also repurchase shares for various other reasons, such as:
- Signaling Confidence: Buying back shares can signal management’s confidence in the company’s future prospects.
- Defense Against Takeovers: A large accumulation of treasury shares can make it more expensive for a potential acquirer to buy a controlling stake in the company.
- Employee Compensation: Companies can use treasury shares for employee stock option plans or other forms of stock-based compensation.

Impact of Treasury Shares:

Share Price: Treasury buybacks can influence the share price in a couple of ways. The increased demand for shares during repurchases can lead to a price increase in the short term. However, the long-term impact depends on how the company uses the freed-up cash from the buybacks. If the company invests the cash strategically for growth, it could benefit the share price in the long run.
Financial Ratios: Since treasury shares reduce shareholders’ equity (the company essentially buys back a portion of its ownership), it can impact certain financial ratios like the debt-to-equity ratio.

Who Can’t Buy Treasury Shares Directly:

Individual investors typically cannot directly purchase treasury shares from the company. These shares are held by the company itself and may be reissued later or remain in the treasury indefinitely.

Overall, treasury shares are a financial tool used by companies to manage their capital structure and potentially influence their stock price. They are not directly investable by individual shareholders, but their existence can affect the overall financial performance and attractiveness of a company’s stock.

Equity Shares VS Preference Shares VS DVR Shares VS Treasury Shares

Comparison of Share Types

Feature	Equity Shares (Ordinary Shares)	Preference Shares	Differential Voting Rights (DVR) Shares	Treasury Shares
Dividend Rights	No guaranteed dividend; dividends paid at company’s discretion based on profits	Fixed or predetermined dividend (usually a % of par value)	Typically higher dividend than ordinary shares	No dividends – not considered outstanding shares
Priority on Dividends	Lowest priority	Highest priority	Higher priority than ordinary shares, but lower than preference shares	N/A
Voting Rights	Yes (one vote per share)	May or may not have voting rights (depends on company terms)	Lower voting rights compared to ordinary shares	No voting rights
Capital Appreciation Potential	High – share price can fluctuate significantly	Lower – price typically remains around par value	Moderate – may have some growth potential	N/A
Risk	Highest – last in line for repayment in liquidation	Lower than ordinary shares – priority on dividends and capital repayment	Moderate – lower voting rights but higher dividends than ordinary shares	No direct risk (not outstanding shares)
Ownership Claim	Represent ownership stake in the company	Represent ownership stake with some preferential rights	Represent ownership stake with limited voting rights	Represent ownership previously held by other shareholders, now owned by the company
Redeemable	No	May be redeemable by the company after a certain period or upon meeting specific conditions	No	N/A
Convertible	No	May be convertible into ordinary shares under certain circumstances	No	N/A
Purpose for Issuing	Raise capital and allow for shareholder participation	Raise capital while offering a fixed income stream to investors	Raise capital without giving away full voting rights	Manage capital structure, increase EPS, or for other strategic reasons

Equity Shares VS Preference Shares VS DVR Shares VS Treasury Shares

Additional Notes:

EPS (Earnings Per Share): Buybacks of treasury shares can increase EPS as there are fewer outstanding shares.
Liquidity: Preference shares and DVR shares may be less liquid than ordinary shares due to their specific features.
Suitability for Investors:
- Equity shares: Suitable for investors seeking high growth potential and willing to take on higher risk.
- Preference shares: Suitable for investors seeking a steady stream of income and lower risk.
- DVR shares: Suitable for investors seeking higher dividends but comfortable with limited voting rights.
- Treasury shares: Not directly investable by individual shareholders.

I hope this comprehensive table provides a clear comparison of the different share types!